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Wednesday, October 12, 2011

Almost all government layoffs are local, but could be paid for by cutting subsidies

Sometimes I feel like a broken record, but it really can't be emphasized too often: state and local subsidies to business have noticeable negative effects on government finances,which are magnified in times of fiscal crisis like the present.

As Kash Mansori points out (h/t Mark Thoma), of the 532,000 government jobs lost from September 2009 to September 2011, fully 470,000 are at the local level.
Source: Kash Mansori, The Street Light

My research suggests that state and local governments give almost $50 billion per year in location incentives to business, and about $70 in total business subsidies. My best guess is that about half of it is at the local level, meaning $25-35 billion per year comes from local governments. It's easy to see that that much money could pay to rehire all those teachers, police, and  other local government workers, and maybe have money left over. At the top end of the estimate, $35 billion could hire half a million workers earning $70,000 a year in salary and benefits, or 700,000 making $50,000 per year.

Make no mistake: we can't just wish state and local subsidies away. Companies leverage their mobility to extract tax breaks (and, increasingly, grants) from governments that need tax revenue and economic activity. But it's impossible to build a politics to oppose these giveaways unless we can document their extent and show what it really is we're giving up when governments award subsidies. Mansori says local budgets are being balanced on the backs of schoolchildren; it would be equally correct to say that local subsidies are paid for out of school budgets, on the backs of teachers and students alike.

Monday, October 10, 2011

Great reporting in Albany highlights growing trend towards use of cash grants by states

The Times-Union in Albany, New York, has a great series up on the $1.1 billion (present value) incentive package given to Global Foundries (formerly Advanced Micro Devices) in Malta, New York, near Albany. Coming so soon after the Commercial Appeal series on Electrolux's move to Memphis, I am hopeful that we will continue to see more in-depth analyses of large incentive deals around the country.

This facility received the largest-ever cash grant given by a state or local government to attract an investment, as I determined in my research for Investment Incentives and the Global Competition for Capital. In terms of total value, it was second only to Boeing's $1.98 billion package from state and local governments in Washington. But AMD/Global Foundries highlights a new trend in the evolution of U.S. subsidy patterns. Historically, the vast majority of incentive packages in this country were made up of tax breaks, and cash was a negligible part of the equation. By contrast, in Europe, cash grants have long been the main form of subsidies for new investment, although tax incentives have frequently been used as well. As I explained in Competing for Capital: Europe and North America in a Global Era, this supported the European Commission's goal of having subsidies given as transparently as possible.

AMD/Global Foundries is the largest cash grant given, but it is safe to see that we are seeing a trend toward growing use of cash grants by state governments. Nucor's deal with Louisiana last year foresees up to $160 million in cash grants to the company if it meets all its expansion and job targets. Reporters in several states have told me they are seeing more cash grants. A shift from tax break to cash grant means that the true size of the incentive is growing, since the present value of cash is obviously higher than that of an equivalent nominal tax break spread over a number of years. When states are dealing with huge budget deficits, the last thing we need is for incentive packages to keep growing larger.

Based on my research, the Times Union also points out that New York state is paying a lot more per job than other states for similar fabrication facilities. By my calculation, AMD/Global Foundries received $927,000 per job for its facility there. By contrast, Samsung in Texas received only $190,000 per job and Hemlock Semiconductor in Michigan got $248,000 per job in 2007 (all calculations at present value, not nominal value). Moreover, New York paid 35% of the cost of the project, whereas Texas only paid 4% of Samsung's costs, and Michigan paid 12% of Hemlock Semiconductor's costs.

The case that New York is overpaying is strengthened when we compare what Germany has had to pay to get plants from the exact same company, AMD/Global Foundries. In 2004, the European Commission approved a subsidy worth 22.67% of the investment or $710,000 per job (at 1 euro=$1.35), significantly lower than New York but in the same order of magnitude. However, after rule changes that cut the maximum subsidy for large projects, the Commission only approved an 11.9% subsidy for AMD in 2009 and a 10.83% subsidy for Global Foundries earlier this year (no job data available in the decisions). You can search for all EU state aid cases here.

Again, kudos to the Times Union, and I hope more newspapers are willing to devote resources to documenting the large cost of subsidies such as these when state governments are suffering huge deficits.